Decoding the new Congress
The Democratic capture of the U.S. Congress last month was a sweet political victory after more than a decade of Republican rule. And despite past tension between the Democrats and the financial community, investors aren’t exactly reaching for the panic button.
“The Democrats’ relationship with business has come a long way in the past 12 years,” says Greg McDonald, a Washington-based Democratic lobbyist at law firm Greenberg Traurig. “The first order of business is not going to be to stick a finger in the eye of the business community or the investor.”
Still, the new majorities in the House of Representatives and the Senate will bring fresh priorities to a host of regulatory, tax and trade issues critical to business. Here’s how the changing of the guard may influence the legislative agenda:
Sarbanes-Oxley: Lawmakers are unlikely to tamper with the controversial 2002 law on corporate governance and accounting, but leading Democrats are eager for the Securities and Exchange Commission to amend compliance rules to ease the burden on smaller companies.
The House’s speaker-designate, Nancy Pelosi, 66, takes just such an approach. “She’s hopeful that the regulatory process will resolve overly burdensome requirements that inhibit the growth of small businesses,” says Drew Hammill, a spokesman for the California Democrat. “Should this occur, there would be no immediate need to reopen Sarbanes-Oxley.” The SEC is scheduled to propose guidelines this month that would make it easier for small companies to comply with Section 404 of the act, which requires businesses to audit their internal controls on financial reporting. The cost of compliance is one of the chief sources of business complaints.
Representative Barney Frank, the Massachusetts Democrat who’s in line to become chairman of the House Financial Services Committee, is also open to some regulatory reform to lighten the compliance burden on smaller companies, according to spokesman Steve Adamske. But Frank, 66, has said he will not seek to amend the law itself, which he believes has helped restore investor confidence in the wake of accounting scandals at Enron, WorldCom and other companies.
The incoming chairman of the Senate Banking Committee, 62-year-old Christopher Dodd of Connecticut, says he is willing to listen to business concerns about compliance costs. “But I’m not quite as convinced as others are that there is as big of a problem associated with Sarbanes-Oxley as some have suggested,” he said at a November press conference.
Fiscal policy: The Democratic majority seems likely to stick broadly with the status quo on taxes. Take the cuts in tax rates on capital gains and dividends, which President George W. Bush won from Congress in 2003 despite opposition by many Democrats. Representative Charles Rangel, the New York Democrat who will chair the powerful House Ways and Means Committee, has said that repealing those tax cuts won’t be a priority, as they are due to expire in 2010, anyway.
As for the estate tax, which Republicans tried but failed to slash just before Congress adjourned for the election, “there is zero chance that the repeal of the estate tax will move forward with the Democrats in control,” asserts Steve Elmendorf, a Washington lobbyist for St. Louis–based Bryan Cave Strategies and a longtime adviser to former House Democratic leader Dick Gephardt.
Instead, Democrats are expected to focus on middle-class tax issues, including reform of the alternative minimum tax. The AMT was created in 1969 to prevent the superwealthy from using deductions and tax shelters to avoid paying some of their income tax. But because it isn’t indexed to inflation, the tax is set to affect millions more taxpayers as incomes rise in coming years. According to the Tax Policy Center, by 2010, 89 percent of married couples with two or more children and income between $75,000 and $100,000 will face the AMT, up from just 1.8 percent in 2005.
The Democrats will look to protect middle-class taxpayers from the AMT and make it easier for families to benefit from child- and education-related tax incentive programs.
Meanwhile, the sparring has already started over Democratic plans to reinstate pay-as-you-go budget rules, which Republicans reject as a thinly veiled method for raising taxes. To demonstrate their commitment to fiscal responsibility, Democratic leaders have promised to restore the so-called pay-go statute, which expired in 2002 and required any new spending increases or tax cuts to be offset by tax increases or spending cuts.
Social Security: In the administration’s view, Social Security reform is still a matter of giving workers the option to put some of their savings in private retirement accounts. Democrats have been sharply opposed to any form of privatization but have not offered a unified solution of their own, for good reason. The choices for reform — among them, raising taxes or reducing benefits — are all wildly unpopular. Their message during the run-up to the election: The only way to fix Social Security is to forge a bipartisan solution. But as long as private accounts stay in the mix, achieving consensus among the parties promises to be a slow and painful process. Most lobbyists believe it unlikely that any changes will be made to the 2006 Pension Protection Act.
Hedge funds: The regulation of hedge funds is not on the House Financial Services Committee agenda, according to Adamske, spokesman for Representative Frank. “His view is that if rich people are losing a lot of money, there is not a lot government should do about it,” Adamske says. But he adds that Frank will ask the committee to take a close look at the size and scope of public pension fund investment in hedge funds.
“There will be a lot of rolling up of sleeves to get educated within the committees,” says John Gaine, president of the Managed Funds Association, a hedge fund trade group. “But we don’t anticipate any rush to regulate.”
Executive pay: This issue ranks high on Frank’s list of priorities. “He is very concerned with soaring executive salaries at a time when wages have been stagnant and thinks shareholders should have more say,” according to Adamske. Last year the lawmaker introduced a bill that would allow shareholders to review and approve executives’ compensation packages. “It is reasonable to assume he will bring back his bill,” says Adamske.
Minimum wage: Democrats will also be at work on the other end of the pay scale. Increasing the minimum wage from $5.15 to $7.25 an hour is one of a handful of popular Democratic measures Pelosi has promised to bring to the floor of the new House in its first 100 hours in session. The minimum wage is currently at its lowest level in 50 years, after adjustments for inflation.
Trade: One of the biggest shifts in the new Congress is an increase in protectionist voices. The House’s freshmen include 29 Democrats known to be generally anti–free trade, according to Public Citizen, a nonprofit advocacy group. Six of the new Senate Democrats are considered skeptical of unfettered trade, including Senator-elect Sherrod Brown of Ohio, who has promised to pressure the administration to pay more attention to the effects of free trade on American workers.
These newcomers will make it difficult for Bush to win an extension of the fast-track authority that allows him to submit trade agreements to Congress that cannot be filibustered or amended. Without that authority, which expires next year, the administration’s trade agenda — completing the Doha round of global trade talks and getting approval of a recent free-trade deal with Colombia as well as proposed agreements with South Korea and Malaysia — could be stymied. And there may be congressional action aimed at trimming the big trade imbalance with China. “There will clearly be a major shift making it much more difficult for the president to implement his free-trade agenda,” says Jim Hyland, a banking and trade lawyer at Greenberg Traurig who worked for the Senate and House banking committees for more than ten years.
Ways and Means’ Rangel is expected to press for a greater emphasis on labor and environmental issues in any new trade agreements. The Bush administration’s view that “more trade is always better” is outdated and ignores the “stark realities of globalization,” according to a Rangel news release. — Kerry Hannon
Milton Friedman’s enduring legacy
Economists are not known for being particularly effusive about fellow practitioners of the dismal science. But when Milton Friedman died last month at age 94, there weren’t enough superlatives to describe his influence on the profession and society at large.
Friedman made his reputation as a monetarist; his dictum that inflation was “always and everywhere a monetary phenomenon” influenced a generation of central bankers. His belief in a strict relationship between money supply and nominal output provided the intellectual basis for then–Federal Reserve Board chairman Paul Volcker’s successful crackdown on inflation in the early 1980s. Although financial innovation would expand what consumers could use as money and render monetary targets virtually obsolete, Friedman’s view that central banks should focus on keeping inflation low, rather than attempt to manage growth, has become accepted orthodoxy around the world. He also championed floating exchange rates years before the Bretton Woods system of fixed rates collapsed in the early ’70s.
“The direct and indirect influences of his thinking on contemporary monetary economics would be difficult to overstate,” Federal Reserve chairman Ben Bernanke wrote in a tribute last month.
Four years earlier Bernanke, then a member of the Federal Reserve Board of Governors, paid extraordinary homage to Friedman on the occasion of his 90th birthday. He recalled that the economist’s seminal 1963 book, A Monetary History of the United States, had in his opinion correctly placed the blame for the Great Depression on the Fed’s contractionary monetary policy in the late 1920s and early ’30s rather than on the 1929 stock market crash. “You’re right; we did it,” Bernanke told Friedman in a speech at the University of Chicago. “We’re very sorry. But thanks to you, we won’t do it again.”
Friedman’s laissez-faire instincts had a broad impact beyond the world of money. He espoused a link between market economics and political freedom in his books Capitalism and Freedom and Free to Choose, and influenced a generation of politicians, including Ronald Reagan and Margaret Thatcher, to seek to trim the role of government. His legacy can be seen in everything from the all-volunteer American military — he led a commission under then-president Richard Nixon that called for abolishing the draft — to earned-income tax credits in the U.S. to Chile’s system of personal pension accounts and Estonia’s flat-rate income tax. All were radical ideas when he first proposed them decades ago.
“Friedman made us all more free-market-oriented,” says Sung Won Sohn, CEO of Los Angeles–based Hanmi Bank and a former chief economist at Wells Fargo.
“Facts helped to establish the correctness of his views,” says Allan Meltzer, a Carnegie Mellon University economics professor who has written a history of the Fed. Friedman, he notes, “swam against a strong and hostile current.” —Tom Buerkle
Name that Tao
’Tis the season for inspirational business books, gifts that promise transcendence but offer all the complexity of a candy cane. The Tao of Warren Buffett, published last month by Scribner, is no exception.
The book was written by Mary Buffett, the billionaire’s former daughter-in-law, and David Clark, a longtime friend of the family — the same duo who first commodified the esteemed investor’s tao, or “way,” in Buffettology (1999). This time the pair have assembled a greatest-hits collection of pithy Buffett utterances, 125 nuggets of wisdom in all. Perhaps sensing a general cultural shift toward the introspective and spiritual, the writers cast the Oracle of Omaha as a modern-day “Taoist-like” teacher (this according to the book’s jacket).
At least the authors have good timing: Buffett gained enormous respect this summer when he donated $31 billion, or 85 percent of his fortune, to the Bill and Melinda Gates Foundation. His mega offering, the largest single philanthropic donation ever, is somewhat in keeping with one authentic Taoist maxim: He who knows he has enough is rich.
Still, any book that dares to call itself the tao of anything risks comparisons to the 1982 pop-cultural classic that made the formula widely known, The Tao of Pooh, by Oregon writer Benjamin Hoff. That book cleverly illustrated esoteric Taoist concepts through the stories of A.A. Milne’s beloved bear, Winnie the Pooh.
Curiously, Buffett’s truisms do occasionally resemble the deep thoughts gleaned within the Enchanted Place at the top of the Forest, or so we discovered.
Pop quiz: Did the following passages appear in The Tao of Warren Buffett or The Tao of Pooh? (Answers appear below.)
a. Can you really explain to a fish what it is like to walk on land? One day on land is worth a thousand years talking about it, and one day running a business has exactly the same kind of value.
b. Because when you’ve been walking in the wind for miles, and you suddenly go into somebody’s house, and he says, ‘Hallo . . . you’re just in time for a little smackeral of something,’ and you are, then it’s what I call a Friendly Day.
c. Someone is sitting in the shade today because someone planted a tree a long time ago.
d. An empty sort of mind is valuable for finding pearls and tails and things because it can see what’s in front of it. An overstuffed mind is unable to.
e. It’s only when the tide goes out that you learn who’s been swimming naked.
f. The main problem with this great obsession for saving time is very simple: You can’t save time. You can only spend it.
g. To use the mind as it’s all too commonly used, on the kinds of things that it’s usually used on, is about as inefficient and inappropriate as using a magic sword to open a can of beans.
h. Anything that can’t go on forever will end. — Lila MacLellan
Jefferies to launch indexes
Think about stock indexes and Jefferies & Co. isn’t the first name that comes to mind. That may soon change: The New York–based boutique investment bank this month is launching some dozen benchmarks designed to measure the performance of small- and midcap stocks in a variety of situations.
Among the firm’s new offerings are general indexes tracking microcap, small-cap and midcap stocks, as well as sector-based benchmarks focusing on subsets of the energy industry, including clean-fuel technology. Several other indexes home in on special situations, such as bankruptcy reorganizations, share buybacks, insider buying and short interest. The firm developed the indexes in-house but is outsourcing their calculation and maintenance to Standard & Poor’s.
Jefferies already lends its name to convertible bond and commodities indexes, but these are the first for its equity division. Why now? Ross Stevens, co-head of equity products, says the indexes were created to help the firm’s analysts and investment bankers, who specialize in small- and midcap companies. Stock researchers can use the indexes to help clients decide whether individual companies will outperform peers in a given field. Jefferies bankers pitching companies on stock repurchase programs might use the firm’s buyback index to demonstrate the positive effect of such actions on share prices.
Stevens adds that Jefferies may one day structure equity derivatives or other investment products based on some of the benchmarks. “Some of these indexes are very investable, but there’s no immediate plan to go in that direction,” he says. “We’ll wait and see. If a few of them really take off, we’ll think about it.” — Justin Schack
Instinet names the Street’s best poker player
What do poker and trading have in common?
Everything, says Anis Attarwala, a Wall Street analyst and Atlantic City regular who last March reached the final rounds in the highly competitive British Poker Open. “It’s all about risk and reward,” says Attarwala, 26. “You play the market just like you play a poker player. Half the time you are playing the guy and the cards don’t matter.”
Last month Attarwala — who covers food, beverages and tech for New York investment firm Prime Logic Capital — played the guys well enough to take home the top prize in the Instinet Poker Classic, a knockout tournament organized for charity. The electronic brokerage invited 120 buy-side clients to the trendy W Hotel, off Manhattan’s Union Square, for a Texas Hold’em competition. The event was meant to be a relaxed mixer, with former Yankees pitching legend Rich (Goose) Gossage roaming the crowd, keeping spirits high. But after three hours of intense bouts, the game came down to two sharks: Attarwala and Intana Capital Management’s Adam Rothstein.
“I had a big lead going into the final round and figured he had nothing; his stack was so small,” says Attarwala, whose king and six beat Rothstein’s jack and four.
The Securities and Exchange Commission prohibits brokerage firms from giving clients gifts in excess of $100, so Instinet will donate a pot of $10,000 to charity on behalf of the top five finishers. But winners get to hold on to the bragging rights, says Instinet spokesman Mark Dowd, who adds that the company will hold a rematch next spring. — Pierre Paulden
And if this stock is accidentally swallowed . . .
Talk about being brutally honest. Starting in May, Pink Sheets, an automated quoting service for small over-the-counter stocks, will begin tagging the less reputable companies trading on its system with some conspicuous warning labels. Quotes for shares in companies whose financial disclosures are either incomplete or not up-to-date will carry a triangular “yield” icon next to their ticker symbols on the Pink Sheets trading platform. Companies that do not make any financial information available will be emblazoned with a stop sign. The most toxic of the bunch — bogus stocks being touted by spam e-mail or otherwise considered a public interest concern — will get a skull-and-crossbones icon.
Labeling its own stocks as financial market poison may seem a curious business strategy for Pink Sheets, a for-profit, New York–based company that has evolved over the past few decades from a service that distributed stock quotes on pink paper mailers into a fully automated marketplace. But the classification is part of a broader effort: Pink Sheets wants to shed its long-standing reputation as a dumping ground for shady companies that can’t meet the listing standards of proper exchanges.
To that end, Pink Sheets is also establishing a new listing service, dubbed OTCQX, designed to distinguish worthy OTC companies from the rest of the pack. The new program, which launches next month, will offer companies a venue for publishing audited financial statements and other shareholder information. (Many of the more reputable companies quoted on Pink Sheets are closely held or based overseas and therefore not subject to SEC reporting requirements.) Issuers that don’t qualify for the premium OTCQX tier will be identified with one of the other, less desirable, labels. Because Pink Sheets earns most of its money from Wall Street firms that make markets in OTC stocks, like Citigroup and UBS, and not from the issuers themselves, it is likely to benefit from identifying which companies are naughty and which are nice.
“There are some problematic people in the over-the-counter space who spend more time issuing press releases and shares than really building businesses,” says Pink Sheets CEO Cromwell Coulson. “We’re hoping to filter out some of those guys.” — Justin Schack
